SUMMARY: The Commission is extending the compliance date for certain amendments to the rule that governs the custody of investment company assets outside the United States.

EFFECTIVE DATES: The effective date of the rule amendments published on May 16, 1997 (62 FR 26923) remains June 16, 1997. Effective (insert date of publication in the Federal Register), the compliance date for the rule amendments, except for the amended definition of an "eligible foreign custodian," is extended to February 1, 1999. The compliance date for the amended definition of an eligible foreign custodian remains June 16, 1998.

SUPPLEMENTARY INFORMATION: The Commission is extending the compliance date for certain amendments to rule 17f-5 (17 CFR 270.17f-5) under the Investment Company Act of 1940 (15 U.S.C. 80a) that the Commission adopted in 1997 (the "1997 Amendments").1 The release that adopted the 1997 Amendments (the "1997 Release") provided that the amendments would become effective on June 16, 1997.2 The 1997 Release further provided that registered management investment companies ("funds") must bring their foreign custody arrangements into compliance with the amended rule by June 16, 1998 (i.e., the fund's board must make the findings required by the amended rule or appoint a delegate to do so by that date).

After the Commission adopted the 1997 Amendments, representatives of mutual funds and ten U.S. bank custodians asked the Commission's Division of Investment Management to clarify whether the 1997 Amendments permit a fund board to delegate authority to a foreign custody manager to select a securities depository that a fund must use if it maintains assets in a particular country (a "compulsory depository"). In a letter dated February 19, 1998, the Division of Investment Management answered that, in its view, under the rule, fund boards can delegate this authority.3

In a letter dated March 24, 1998, mutual fund representatives stated that certain requirements of the 1997 Amendments may present unanticipated problems when a foreign custody arrangement involves the selection of a compulsory depository.4 They asserted that, because most depositories are governmental or quasi-governmental organizations, it may not be possible for funds (or their foreign custody managers) to obtain necessary information to make the findings contemplated by the rule, to negotiate terms or conditions in custody agreements, or to assure U.S. jurisdiction over foreign custodians. The fund representatives stated that they and representatives of custodian banks will soon submit to the Commission proposed revisions to the 1997 Amendments that would address these problems. In the interim, the fund representatives requested that the Commission suspend the compliance date for the 1997 Amendments to facilitate consideration of this submission.

The fund representatives state that a suspension is necessary because many funds have been unable to establish new custodial arrangements under the 1997 Amendments.5 Fund representatives also state that funds did not become fully aware of potential difficulties in applying the 1997 Amendments to compulsory depositories until recently, when they began to revise their foreign custody arrangements to attempt to comply with the amendments. Because of the difficulties in applying the rule, the fund representatives assert that many funds may not be prepared to comply with the 1997 Amendments as of June 16, 1998. Some fund groups reportedly have considered withdrawing their assets from foreign custodians altogether, despite the burdens of alternative holding arrangements.6

The Commission is extending until February 1, 1999, the compliance date for the 1997 Amendments, except for the amended definition of an "eligible foreign custodian," the compliance date for which will remain June 16, 1998.7 The extension of the compliance date for the other amendments will give the Commission time to review the proposal to be submitted by representatives of funds and banks, and to evaluate whether refinements to the 1997 Amendments are needed.8

Until February 1, 1999, a fund may maintain its foreign custody arrangements under either of two regulatory frameworks. First, the fund may continue to comply with rule 17f-5 as it existed prior to the 1997 Amendments ("old rule 17f-5"). Because the compliance date for the amended definition of eligible foreign custodian will remain June 16, 1998, a fund may comply with old rule 17f-5 while also selecting a custodian that is an eligible foreign custodian under the amended definition. Second, in the alternative, a fund may comply entirely with rule 17f-5 as amended by the 1997 Amendments (the "amended rule").

The fund may apply either of these alternative frameworks separately to each foreign custodian it uses. The fund's arrangement with a particular foreign custodian or subcustodian, however, should comply in its entirety either with old rule 17f-5 (subject to the amended definition of eligible foreign custodian), or with the amended rule.9

The Commission for good cause finds that, based on the reasons cited above, notice and solicitation of comment regarding the extension of the compliance date for certain of the 1997 Amendments is impracticable, unnecessary, and contrary to the public interest.10
The Commission notes that the original compliance date is imminent, that many funds reportedly are not in a position to comply with the 1997 Amendments, that funds need prompt guidance concerning the regulatory requirements that will apply to their foreign custody arrangements, and that a limited extension will aid funds, bank custodians, and the Commission in considering whether additional amendments are necessary. Fund representatives have stated that, without a suspension of the compliance date, some funds may withdraw assets from foreign custodians, which could increase costs for investors or otherwise harm investors.11 The Commission also notes that the 1997 Amendments were themselves submitted for public notice and comment, and that any amendments that may be considered in the future will be submitted for notice and comment.12

In analyzing the costs and benefits of this action, the Commission believes that the extension of the compliance date for certain of the 1997 Amendments will not impose costs on funds, but will enable funds to avoid the costs of attempting to comply with provisions of the rule that they assert may be unworkable for some funds. The Commission believes that the extension will produce potential benefits for funds by allowing funds the option to comply with the amended rule or the old rule, and by permitting funds and bank custodians to present a proposal to refine the 1997 Amendments.

See rule 17f-5(a)(1) (17 CFR 270.17f-5(a)(1)). This provision of the amended rule generally expands the class of eligible foreign custodians that may hold custody of fund assets. The amended definition of eligible foreign custodian also includes the definitions of "qualified foreign bank" and "U.S. bank," which also will remain subject to the June 16, 1998 compliance date. See rule 17f-5(a)(4) and (7) (17 CFR 270.17f-5(a)(4) and (7)). Retaining the original compliance date for this definition will enable funds to rely upon a provision of the 1997 Amendments that appears not to have presented difficulties, and avoid the necessity of seeking exemptive relief from the Commission to permit the use of a custodian that would qualify as an eligible foreign custodian under the amended definition.

The extension of the compliance date is effective upon publication of this release in the Federal Register because the extension "grants or recognizes an exemption or relieves a restriction." 5553(d)(1).

A fund may not seek to comply with the rule by meeting certain requirements of the old rule and certain requirements of the amended rule (other than the amended definition of eligible foreign custodian).

See section 553(b)(3)(B) of the Administrative Procedure Act (5 U.S.C. 553(b)(3)(B)) (an agency may dispense with prior notice and comment when it finds, for good cause, that notice and comment are "impracticable, unnecessary, or contrary to the public interest").

The extension generally preserves the status quo that has existed since the adoption of the 1997 Amendments. Funds have been permitted to comply with either the old rule or the amended rule since June 16, 1997, the effective date of the 1997 Amendments. Retaining the original compliance date for the amended definition of eligible foreign custodian will allow funds to rely on a provision of the amended rule that appears not to have presented difficulties.